Most freelancers set their rate by looking at what others charge. That tells you what the market tolerates, not whether the rate keeps you in business. A better start is a floor: the lowest rate at which you still earn what you need. Here is the formula and a worked example.
The formula
Minimum hourly rate = (target net income + business costs + taxes) / billable hours
Each part is easy to underestimate.
- Target net income: what you want to take home in a year, after everything.
- Business costs: software, equipment, insurance, accounting, coworking, training. Add them up for a full year.
- Taxes and social contributions: as self-employed you pay them yourself, so include them in the total you need to cover.
- Billable hours: not 40 per week. Sales, emails, invoicing, unpaid revisions, holidays and sick days all cut into it. Many freelancers bill 20 to 30 hours a week over 44 to 46 working weeks.
A worked example
Say you want 50,000 net. Costs add 8,000 and taxes add 12,000, so you need to bring in 70,000.
You work 45 weeks and bill 22 hours a week, which is 990 billable hours.
70,000 / 990 = about 71 per hour. That is your floor, not your price. Anything below it means you pay to work.
Check the result against a real project
Rates are easy to misjudge, projects are not. If you quote a fixed price of 3,000 and the job takes 60 hours, you earned 50 per hour. Compare that number with your floor, not with the price you quoted.
Day rate and salary comparisons
Two conversions come up all the time:
- Hourly to day rate: multiply by the hours you can really bill in a day (often 5 to 6), not by 8.
- Salary to freelance rate: do not just divide a salary by 2,080 hours. Add the costs an employer used to cover, and divide by billable hours instead.
Three habits that protect your rate
- Track your time for one month to find your real billable ratio.
- Raise rates for new clients first. Existing clients are harder to move.
- Revisit the floor every year, because costs and taxes change.
Run it with your own numbers
I work on KIWI, and we published free calculators for exactly these steps. No signup is needed:
If your numbers differ from the example, I would like to hear which part felt off: the billable hours, the tax estimate or the costs.
Top comments (1)
The tax line is the one I'd check first, because it isn't a fixed amount you add on top. It's a percentage of profit, so it moves with the rate you're solving for.
If you're a US freelancer, your example holds up pretty well. 70,000 in revenue minus 8,000 in costs is 62,000 of profit. Self-employment tax is 15.3% on 92.35% of that, about 8,760. Federal income tax for a single filer, after the standard deduction, half of the SE tax and the 20% QBI deduction, comes to roughly 3,700. That's about 12,500 total, right around your 12,000. State tax isn't in there though, so in California or New York add another 1,500 to 2,500 and the floor goes up about 2 an hour.
The other thing US freelancers miss is timing. Nobody withholds on that income, so the IRS wants it in four estimated payments (Apr 15, Jun 15, Sep 15, Jan 15). If the tax money only gets paid in April, you can owe an underpayment penalty even when you pay the full amount.